MONEY

The Secret Weapon To Early Retirement: Your Home

2013 Getty Images

The housing market’s recent recovery may be one of the things that’s giving you the confidence — and the wherewithal — to retire ahead of schedule. Home prices in 20 major metro areas are up 12% over the past year, the biggest gain since 2006, according to the widely followed S&P/Case-Shiller home price index.

In seven of those markets, values are higher than or nearing their pre-crash peak, says David Blitzer, managing director at S&P Dow Jones Indices. American homeowners have seen their equity rise more than $2 trillion in just the past year, according to the Federal Reserve.

Alas, you can’t count on a housing boom to keep padding your net worth. With rising mortgage rates and tepid economic growth, the pace of price gains is expected to slow. “A year from now home prices will be higher, but half the double-digit gains we’ve seen,” says Blitzer.

You need to set realistic expectations for what your home can do for you, and plan prudently with what you have. That might mean leaving your old digs behind.

What to do

Lose two bedrooms. Moving out of your home of decades can pay off in two ways. By selling into a strong market now and buying a smaller house, you can lock in your good fortune, letting you add to your savings or wipe out any lingering debts.

Related: How much house can you afford?

Plus, if retiring early means learning to live on less, there’s no better way to do that than to cut your housing costs, which typically eat up 40% of retirees’ budgets, according to the Consumer Expenditure Survey.

Get out of town. Only 10% of retirees pick up stakes, though boomers look to be a bit more likely to relocate than previous generations were. In a 2012 AARP survey, two in 10 boomers said they planned to move in retirement.

“Boomers are different,” says Fred Brock, author of Retire on Less Than You Think. “They are willing to move to cheaper parts of the country.” With families more mobile, he adds, you don’t need to be tied to one place to stay near your kids.

Join this minority and move to a town with lower property taxes and lower living costs, as well as cheaper homes, and you can leverage your profits even more. That’s what Sheri and Bill Pyle did when they sold their three-bedroom Cape Cod outside Chicago for $185,000, paid cash for a $128,000 four-bedroom ranch in Tennessee, retired a home equity line and car loan, and added $30,000 to their savings.

And though their income is less than 40% of the $126,000 they used to earn, their cost of living is so low that they are able to get by on their combined Social Security, leaving their $400,000 in retirement savings to grow for now.

Their property taxes plummeted from $7,000 to $500 a year. Milder winters mean their heating bills are a third of what they used to pay. “We could never have done it if we stayed in Chicago,” says Sheri.

Beware the trap of leisure fees. Whether you downsize locally or across the country, it’s crucial that you don’t simply trade maintenance costs for steep association fees.

“I see a lot of people who move into a new home for retirement, and their cost of living goes up, not down,” says Colorado Springs financial planner Linda Leitz, national chair of the National Association of Personal Financial Advisors.

When Gundy and Karen Gunderson retired in 2007, the Seattle couple bought a home in a gated country-club community in Las Vegas. But they were surprised at how quickly the costs added up. Gundy, 66, a former commercial airline pilot, and Karen, 67, a homemaker, estimate they were spending $1,000 a month on dues for the private golf course, tennis and fitness classes, the club’s restaurant minimum, and maintenance on their pool and lawn.

“We ran the numbers and knew we had to make an adjustment if we wanted our money to last,” says Gundy. So this year they downsized a second time, to a Henderson, Nev., retirement community overlooking two public golf courses. Now all they pay is a $93 monthly association fee.

Invest in staying put. All this said, what if you really don’t want to leave your home? At a minimum, early retirees told us they avoided carrying a mortgage into retirement, as 30% of retirees do.

While you’re still working, invest in improvements that will cut costs later, like replacing old appliances and drafty windows and upgrading your heat and electrical systems. “If you’ve been in your home a long time, there’s a lot you can do to make it less costly,” says Stillwater, Okla., financial planner Louise Schroeder.

MONEY

Dreaming Of Early Retirement? Three Secrets To Making It Work

Bill and Christina Balderaz, 39 and 37, Upper Arlington, Ohio. The couple got a windfall when Bill's company was sold. But in hopes of retiring before 60, they continue to spend as carefully as before. Sam Comen

Against the backdrop of rebounding stock and home prices, you're feeling flush—and once again dreaming of quitting while you're young. Yes, you can retire early. But the game has changed. Learn the ropes from people like you who are doing it right.

Funding your retirement, never a breeze, has become tougher in this economy. Interest rates are hovering near historic lows, and bond guru Bill Gross recently warned that low rates may persist for decades. So what you can earn on low-risk cash and bonds will remain paltry.

Wade Pfau, a researcher and professor at the American College of Financial Services, has calculated sure-fire retirement savings rates in this rate environment.

If you hope to retire at age 65 and start saving at 35 — when baby boomers typically began, a May 2013 Bank of America Merrill Edge survey found — it’s 15% to 19% a year. Move your retirement date up by five years, and those rates go to 23% to 29%, Pfau says.

You probably can’t hit those daunting targets year in, year out. So the trick is to gain ground when you can — and be willing to make the math work by living on less.

What to do

Buckle down. You can catch up with bursts of savings — often easier once big expenses like college or a mortgage fall away.

According to retirement research firm Hearts & Wallets, saving 15% or more of your income for eight to 10 years — early or late in your career — can ensure that you save enough to retire comfortably at 65. Such power saving is common among early retirees too, says Hearts & Wallets co-founder Laura Varas, but the rate is 25% or more.

Related: 10 Best Places to Retire

Calvin Lawrence was able to retire from his job as executive director at Corinthian College in Chesapeake, Va., four years ago at 59, even though he hadn’t gotten serious about retirement planning until after he divorced at 50.

At that point he had about $200,000 set aside. With his two children out of college (and out of the house), tuition and other child-care bills were gone. And a promotion had boosted his pay by $20,000.

Even though he made $110,000 a year, “I lived like I earned $50,000,” says Lawrence, now 63. “I found that I don’t need to spend a whole lot of money to be happy.” The result: He built his savings to $800,000.

Put windfalls to work. Whether it’s an inheritance or a bonus, a windfall can make the difference between leaving early and working until 65.

When Bill Balderaz, now 39, sold the social media marketing business he founded in 2011, he and his wife, Christina, an elementary-school teacher, put themselves on the road to retirement in their fifties. With profits of a few hundred thousand dollars, the couple wiped out the big expenses that often make saving for the future hard — paying off the mortgage on their home in Upper Arlington, Ohio, and setting aside public school college tuition for their kids. The rest went toward retirement funds, which now total $600,000.

Related: Will you have enough to retire?

Just as critically, they didn’t ratchet up their spending. “We didn’t buy a Mercedes or build a new house or send our kids to private schools,” says Bill, now president of Fathom Columbus, the online marketing firm that bought him out.

He still drives a 17-year-old Toyota Tacoma pickup truck. In the market for a boat for the family — the children range from 10 months to 11 years — he bought a decade-old 18-footer off Craigslist for $9,000. A similar new one would have cost $27,000. “We live like the acquisition didn’t happen,” Bill says.

Set low expectations. To get away with saving less, commit to living on less. Planners typically suggest you aim to replace 70% to 80% of your pre-retirement income, which doesn’t amount to a dramatic lifestyle change once you eliminate the money you were saving, Social Security taxes, and commuting costs.

If you can make it on 50%, you need to save 11.8 times your income by age 60, vs. 17 times if you hope to live on 70%, says Charles Farrell, CEO of Northstar Investment Advisors.

As you’ll see in rule No. 3, housing could be the key to doing this. Plus, “people who want to retire early are usually already living well below their means,” notes Farrell. “This might not be a big change.”

MORE: New rules for early retirement

Rule 1: Early retirees: Don’t fear losing your health insurance

Rule 3: Use your home to boost retirement savings

Rule 4: Get the first decade of retirement right

Rule 5: Retiring? Time to look for a part-time gig

MONEY

Early retirees: Don’t fear losing your health insurance

Health insurance has long been one of the biggest obstacles to early retirement. Few employers offer coverage — just 18% of current private-sector workers are eligible for pre-65 retiree benefits, vs. 29% in 1997, according to EBRI.

And buying a policy on the private market before you qualify for Medicare at 65 has been a challenge: A condition like diabetes or heart disease can leave you uninsurable, while even healthy 50- and 60-year-olds pay far more than young people for the same coverage.

A recent Center for Retirement Research study found that the spike in retirement at 65 is due in large part to Medicare eligibility.

Under health reform, all that is poised to change. Regardless of your health, you can buy a comprehensive insurance policy through the state online exchanges that went live Oct. 1. Your age will still push up your premium, but a 60-year-old can’t be charged more than three times what a 20-year-old pays, down from today’s typical 5-to-1 ratio.

“Early retirees will be the biggest beneficiaries of the exchanges,” says Caroline Pearson, vice president at the consulting group Avalere Health.

What to do

Put a price tag on it. Obamacare means you can’t be turned down or charged more for health reasons, but it doesn’t necessarily mean a policy will be cheap. In the 36 states where the federal government is operating exchanges, monthly premiums for mid-level plans are averaging $432 for a 55-year-old and $526 for a 60-year-old, says Carrie McLean, head of customer care at eHealthInsurance.com; rates for a 55- to 64-year-old on the private market today average $329.

But that price difference reflects more robust coverage. A bare-bones policy you could buy this year might carry a $10,000 deductible or omit prescription-drug coverage — required for policies sold on the exchanges. Your combined deductible and out-of-pocket costs will also be capped, at $6,350 for an individual and $12,700 for a family.

“The insurance market is pretty scary for early retirees right now,” says Karen Pollitz, a senior fellow at the Kaiser Family Foundation. “It won’t be so scary anymore.”

Start at healthcare.gov to find options in your state. Heavy traffic and tech glitches made applying a headache right after enrollment opened, but you have until Dec. 15 to sign up for coverage starting on Jan. 1.

Check for price cuts. The premium is just the sticker price. About half of those who buy insurance on their own today will qualify for a subsidy, estimates Kaiser. And since that help is based on how much of your income must go toward insurance, an early retiree with a high premium has a good chance of qualifying for a break, especially if retirement means living on less.

A 60-year-old couple making $62,000, for example, would qualify for a subsidy that would bring a $1,140 monthly payment down to $491, according to the Kaiser Family Foundation subsidy calculator (available at kff.org). For a single person, the annual income cutoff to qualify for a subsidy is $45,000; for a family of four, it’s $94,000.

All that is good news for 62-year-old Sheri Pyle, who retired to Henry, Tenn., last year with her husband, Bill, 18 months after he left his job at a family-owned heating and plumbing firm at 62. Weary of Chicago winters and 60-hour workweeks, the couple dreamed of spending their days in warmer climes, camping, fishing, and volunteering. They now pitch in at the county search and rescue.

“We wanted to quit working while we’re still young enough to enjoy our lives and give back,” says Sheri, who managed the accounting department for a food manufacturer. Bill, now 65, qualifies for Medicare. But Sheri, who has arthritis, has been worried about her insurance costs once her former employer’s $400-a-month COBRA coverage ends in December. On the Tennessee exchange her monthly premium would run $593 for a midlevel plan. But she’ll qualify for a subsidy that will knock it down to $345.

 

MONEY real estate

Best Places to Retire

Love the culture and excitement of urban life, but loathe the congestion and cost? One of these ‘second cities’ could be your first-choice retirement spot.

If the thought of retiring to a sleepy beach town or country hamlet bores you silly, you’re not alone. Increasingly, retirees are “interested in urban center communities,” says John McIlwain, senior fellow at the Urban Land Institute. “They don’t want to be isolated out in the suburbs.” It’s not surprising that people want to spend their post-work years surrounded by the arts, cutting-edge health care, and diverse neighbors, but the cons of urban living (like cost) can be daunting. So we set out to find places that won’t ding your nest egg with high taxes and nosebleed prices, yet still have great attractions and plenty of your peers. Here are five affordable small cities you may one day want to call home.

  • Raleigh, N.C.

    This state capital’s thriving economy and proximity to top universities have long made it a prime relocation destination. And recently more of those new faces have had a few wrinkles: From 2000 to 2010 the city’s population of 55- to 64-year-olds shot up by 97%, according to the Brookings Institution.

    It’s not hard to see the draw: Raleigh provides a big-city feel with a low cost of living; mild, four-season weather; and, thanks to all those medical schools, world-class health care.

    Where to live

    Midtown/North Hills: Retirees looking for a good deal and a practical location should shop north of downtown, says local real estate agent Kim Crump. There you’ll find spacious townhouses starting at around $200,000.

    Downtown: Those willing to pay about twice that price may consider the new condos and lofts downtown. “It’s stimulating to be around a young and diverse population,” says Jim Belt, now 62, who retired from finance in 2006 and along with his wife, Donna, moved from London to downtown Raleigh.

    The couple say living in the center of things made it easy to get involved. Jim founded a downtown residents group. Donna, 59, started BEST Raleigh, a group that puts art in vacant storefronts.

    What to do

    Food: The city has a diverse restaurant scene, with everything from Afghan cuisine to Southern barbecue.

    Music:
    The 5,000-seat Red Hat Amphitheater hosts the big acts, while the opera and symphony perform at the Duke Energy Center for the Performing Arts.

    Art:
    A range of work is on display in galleries, public spaces, and parks. Or take in the 30 Rodin sculptures at the North Carolina Museum of Art.

    Education: North Carolina State University’s lifelong-learning program offers affordable courses and study trips on topics including garden ecology and classical music.

    Taxes

    Like most of the states in this gallery, North Carolina does not tax Social Security benefits. The state has no inheritance or estate tax.

    Income tax:

    • 5.8% flat (starting 2014)
    • Sales tax: 6.75%
    • Median property tax: $1,800

     

  • Pittsburgh

    Talk about a comeback. At the turn of the 20th century Pittsburgh was an economic and cultural hub, home to Andrew Carnegie and other captains of industry. Then came deindustrialization and job losses in the 1980s. Now the city is polishing its rusty image by converting old mills and factories into office space, galleries, and lofts.

    The once-dwindling population is also bouncing back; the city took the top spot in U-Haul’s 2012 relocation survey, with a 9% jump in transplants. For retirees, Pittsburgh offers a true urban experience, including good public transportation, pro sports, and a host of top universities, all at a bargain price.

    Where to live

    The Northeast and South: Jim and Deborah Bogen moved to Pittsburgh from California in 2000, when Jim, now 78, retired from the philosophy department at Pitzer College.

    During a teaching stint at the University of Pittsburgh, he fell in love with the town, its 90 eclectic neighborhoods, and the green, hilly landscape. For Deborah, the move to a more affordable city had major practical implications. “If we hadn’t come here, I’d still be working,” says Deborah, 63, who retired from her paralegal job at age 50 and now writes poetry and novels.

    Homes in popular neighborhoods like Highland Park (where the Bogens live) or the South Side are now fetching more than $300,000 or so, double what the Bogens paid. Still, many remain a bargain by other big-city standards. Plus, the area is easy to navigate on foot, providing an extra perk: “I lost 20 pounds the first year we lived here,” says Deborah.

    What to do

    Museums: The four Carnegie Museums span art, science, natural history, and a collective 1.3 million square feet. The Andy Warhol Museum is a local favorite (the artist grew up here).
    Performance: Renovated concert halls are home to a thriving symphony, ballet, and opera.
    Sports: Thanks to the Steelers, Penguins, and Pirates (who recently made the playoffs for the first time since 1992!), superfans can stay busy all year.
    Outdoors: There are five large city parks, including the 561-acre Frick Park, where you can try lawn bowling or tennis.

    Taxes

    Distributions from most retirement plans, including qualifying 401(k)s and IRAs, are largely exempt. There is an inheritance tax, but there is no estate tax.

    • Income tax: 3.07% flat
    • Sales tax: 7%
    • Median property tax: $2,450
  • Lexington, Ky.

    Retirees looking to mix city activities with country charm will find a lot to love here. Lexington’s historic downtown is packed with galleries, restaurants, and boutiques. But drive just a few minutes and you’re in the rolling hills of Bluegrass Country.

    The city is also home to one of the country’s oldest and most robust lifelong-learning programs, as well as the top-scoring University of Kentucky Albert B. Chandler Hospital, which has received accolades from the American Heart Association and National Cancer Institute.

    Where to live

    Downtown: Over the past decade, a crop of new condos and loft conversions has transformed the center of Lexington. Indeed, developers got a little overzealous during the boom years, says realtor Casey Weesner, so prices stagnated and condos sat empty in the wake of the housing crash.

    The market has picked up in the past year, he says, but there are still some downtown bargains to be had. Expect to see modern two-bedroom condos priced around $200,000.

    What to do

    Sports: Welcome to basketball heaven. The Wildcats, the University of Kentucky’s powerhouse team, play at Rupp Arena, which also hosts shows and big music acts.
    Education: Locals age 65 and older can sit in on university classes, sans tuition, whenever there are open seats. The school’s Osher Lifelong Learning Institute offers classes for the 50-plus set.
    Arts: The campus also boasts the Singletary Center for the Arts. Downtown, the Kentucky Theatre shows independent and classic films.
    Outdoors: Churchill Downs, home of the Kentucky Derby, is 90 minutes away. Bikers can hop on the 12-mile Legacy Trail, which leads to the equine events at Kentucky Horse Park.

    Taxes

    Up to $41,110 per person in retirement income is exempt. Homeowners 65 or older get a property tax break. Some family members are exempt from the inheritance tax.

    • Income tax: Top rate is 6%
    • Sales tax: 6%
    • Median property tax: $1,620
  • St. Petersburg, Fla.

    Can’t imagine retirement without a beach? In St. Pete you can dip your toes in the Gulf of Mexico or Tampa Bay — plus play a round of golf, eat virtually any type of cuisine, and see famous art, all in a single day.

    While St. Petersburg is undoubtedly a retiree hotspot, the city has also drawn more young families in recent years, says local realtor Judy Horvath. The mix helps keep the city vibrant and stocked with boutiques, galleries, and restaurants.

    Where to live

    Downtown: The market for new apartments and condos was flattened by the bust, but developments are now back on track and in many cases selling out quickly. New two-bedrooms downtown start at around $300,000, says St. Petersburg agent Rachel Sartain.
    Surrounding neighborhoods: If that’s too expensive, going five or 10 minutes outside of downtown brings prices down dramatically; condos in many central areas start in the $200,000 range, says Sartain.

    What to do

    Beaches: Two of the nation’s best (according to TripAdvisor readers) are just a 10-mile drive from downtown, including North Beach, located in the 1,140-acre Fort De Soto Park.
    Art: Try the Dalí Museum for works by the Spanish surrealist, or the Museum of Fine Arts for Monet and O’Keeffe
    .
    Sports:
    Tropicana Field is home to the Tampa Bay Rays. There are also plenty of golf courses, including Mangrove Bay, a par-72 championship course. At $25 a round, these municipal greens may be the city’s best bargain.

    Taxes

    Retirement income is not taxed. Permanent residents get a property tax exemption of up to $50,000.

    • Income tax: None
    • Sales tax: 7%
    • Median property tax: $1,080
  • Boise, Idaho

    © imagebroker / Alamy

    Moving to a mountain town means easy access to skiing, hiking, golf, fly-fishing, and more. Unfortunately, it also usually means jaw-dropping home prices, a dinky airport, limited health care, and tourists galore. Not in Boise.

    Yes, locals here can ski at Bogus Basin 16 miles from downtown, stroll or bike 85 miles of trails, and paddle or fish on the Boise River, which runs through town. But they’ll also find low taxes and affordable homes.

    Plus, Boise has become a nucleus of culture and health care. Saint Alphonsus Regional Medical Center is ranked in the top 5% of hospitals nationwide for clinical performance.

    Where to live

    North and East of downtown: Prices in the city center are steep, so buyers should concentrate on the surrounding neighborhoods, says Boise real estate broker Jason G. Smith. “Traffic isn’t an issue,” he says. “So you don’t need to be right downtown to enjoy it.”

    You’ll find two-bedroom condos or small single-family houses priced at about $300,000 in the North End.
    Southeast and Northwest Boise: On a tighter budget? Head to these neighborhoods (located about 10 minutes from the city center) for homes starting around $200,000.

    What to do

    Outdoors: Walk along the Boise River Greenbelt or explore the trails winding out of Hull’s Gulch or Camel’s Back Park. The city has two open-air Saturday markets, which are a great place to find produce and bump into friends.
    Art: The Boise Art Museum has 3,000 permanent works and presents diverse exhibitions ranging from site-specific installations to collections of ancient artifacts.
    Performance: Grab tickets for the opera, philharmonic, or ballet. Boise State’s Morrison Center hosts national tours of Broadway shows, stand-up comedy, and live music, while the Shakespeare Festival fills a 770-seat outdoor amphitheater.

    And there’s more to come: Construction is under way for a new $70 million, 65,000-square-foot cultural center, slated to open in 2015.

    Taxes

    Retirement benefits are taxed, though some types of pensions qualify for a deduction. There is no inheritance or estate tax.

    • Income tax: Highest is 7.4%
    • Sales tax: 6%
    • Median property tax: $1,230
  • Spokane, Wash.

    © Andre Jenny / Alamy

    Unlike gloomy Seattle, Spokane basks in about 260 days of sunshine a year. Want to get out and soak up that vitamin D? The Spokane area has 76 lakes and five ski resorts, plus plenty of golf courses and wineries.

    The city has urban appeal too, with a downtown that’s become a destination for retirees looking to trade high maintenance homes for condos that are walking distance from restaurants, art galleries, and theaters.

    Spokane residents do pay a hefty 8.7% sales tax, but the state has no income tax.

MONEY retirement planning

Get your spouse on the same page about retirement

You’ve got your dream retirement all figured out … but does your fantasy match your spouse’s?

With only 38% of couples planning together, as a 2013 study from Hearts & Wallets found, it’s no surprise that nearly two-thirds don’t agree on when they’ll each leave their jobs, and a third aren’t in sync on where they’ll live.

“Most couples avoid having these conversations because they know there’s conflict,” says psychologist Dorian Mintzer, co-author of The Couple’s Retirement Puzzle.

But the sooner you air expectations, the better your odds of having a retirement that will make you both happy.

The Ground Rules

Prioritize your wants. Suggest that you and your spouse independently make lists of what you want from your retirement before you chat. This ensures everything gets out in the open, says Jan Cullinane, co-author of The New Retirement.

Ditch the “all-me” attitude. Making your wants clear is necessary, but for the best result, avoid pitting your vision against your partner’s. Listen without interrupting, repeat back responses, and avoid criticizing.

When You’re Face to Face…

1. Opening gambit: “We haven’t really ever discussed what we want to do when we retire. Can we set aside time to talk?”

Why it works: You’re easing in by focusing on what will make you happy. “Asking ‘What are your goals for this stage of life, and what will fill your hours?’ will help you figure out what retirement means to both of you,” says Bart Astor, author of The Roadmap for the Rest of Your Life. This can also tee up a discussion of timing.

2. Explain concerns: “You said that you’d like for us to retire together in 10 years. Because I’m younger, I worry that I’d end up having to quit at the peak of my career.”

Why it works: Repeating a partner’s point shows you appreciate his or her view but also gives you a chance to subtly raise concerns and alternatives in a way that feels collaborative.

Age differences and life expectancy — however tough to discuss — must be brought to bear, since wives tend to be younger than their husbands and usually outlive them, Cullinane notes.

3. Talk money: “Let’s go through our finances and see if we can afford some of these ideas.”

Why it works: Once you understand the realities of your budget, you can better prioritize competing goals, says San Diego financial planner Andrew Russell.

You may want to sit down for a session with a financial planner, who can help you run scenarios (figuring out when to claim Social Security is a particularly hairy challenge) and who can also serve as arbiter to keep emotion out of the discussion.

4. Know the backstory: “Can you tell me why it’s important to you that we buy a condo on the beach?”

Why it works: Focusing on the “why” vs. the “what” pushes you toward compromises that reach the heart of both your desires, and are within the terms of your budget. This also makes it less likely either of you will see concessions as losses.

5. Go to middle ground: “Since we both want to retire by 67 and live an hour from the grandkids, how about we work on a plan around that?”

Why it works: Even if you can’t agree on specifics yet, stressing your similarities can help you move ahead on a general path that places your wants as a couple first. “But don’t feel like the plan is set in stone,” says Mintzer. “Revisit it as often as you would your portfolio.”

MONEY Health Care

Health Savings Accounts: A Rx for Retirement

A health savings account can do double duty and help you build your retirement nest egg. Photo: Joshua Scott

A health savings account helps you stash cash for today's medical costs, but it can also help you build a bigger nest egg.

How would you like a triple-tax-free way to save for certain retirement expenses?

No, this isn’t the latest Nigerian email scam. Rather, it’s the very real advantage of a Health Savings Account (HSA), an investment vehicle available to those with qualifying high-deductible health insurance plans.

The pretax money you put in is meant to be used for that year’s unreimbursed health costs, but unspent funds can be rolled forward to grow tax-deferred and withdrawn tax-free at any later date to pay for health care.

After 65, you can also tap the account for nonmedical expenses without penalty; those withdrawals will be taxed as income just like a traditional IRA.

Considering that a 65-year-old couple leaving the workforce today can expect to spend $220,000 on health care, as Fidelity reports, it’s no wonder HSAs are gaining traction as a retirement savings tool. “They’re the best deal in town,” says Scottsdale, Ariz., financial planner Dana Anspach, author of Control Your Retirement Destiny.

Of course, the HSA works as a retirement account only if you can sock away more than you need for this year’s medical costs. Therein lies the challenge. Here’s how to ensure an HSA will offer you a healthier retirement.

Make sure you’ll benefit

Premiums on HSA-eligible health plans are less expensive than those of lower-deductible plans, but you could spend more overall depending on your health. That’s because of the deductible. In 2013, this must be at least $1,250 for individuals and $2,500 for families.

The HSA is meant to help you save for this and other out-of-pocket costs; in 2013, individuals can stash $3,250, families, $6,450. Those 55-plus can add another $1,000. Also, 72% of employers contribute—an average $920 for singles, $1,600 for families, Kaiser Family Foundation reports. Assuming you’re covered through work, your employer will pick a default custodian for the account.

To end up with a balance at retirement, you’d need to let some of the money in the HSA ride each year. The more you pay in, the better your odds of having leftover funds. Being healthy helps too. (Use the tool at WageWorks to compare an HDHP/HSA with other insurance plans, based on last year’s usage.) Medical needs are unpredictable, though, so also consider how you handle costs when they come up.

Jacksonville financial planner and MD Carolyn McClanahan says you’re more likely to have money to spare if you know how to work the health care system—e.g., comparing prices and asking for generic meds.

Fill the right buckets

Most HSA users tap their accounts for immediate health care costs, allowing what’s left to roll forward. To really grow the HSA, however, you could dedicate it to retirement by paying health costs with other savings. “This makes sense for those who have spare cash flow,” says Coral Gables, Fla., financial planner Joshua Mungavin.

Wherever you store the money, aim to set aside at least two times the deductible for current bills, says Anspach. Beyond that, how does an HSA fit into the hierarchy of retirement accounts? Though it has the best tax benefits, it isn’t as flexible as a 401(k) or IRA. Prior to 65, you pay a 20% penalty on nonqualified withdrawals, for example. So fund your 401(k) up to any match, then split your remaining money among a Roth IRA, 401(k), and HSA.

Invest for now and later

Keep money earmarked for today’s health care in cash. (Some custodians require you to maintain a cash balance anyway—typically $1,000 to $2,500—before you can invest.) The rest of the HSA can be allocated as you would your other retirement dollars, says Mungavin.

Mutual fund choices tend to be limited though, notes Roy Ramthun, president of HSA Consulting Services. Some custodians offer less than 20.

No good ones in your employer’s offering? Roll it over to another custodian; compare options at HSASearch.com. You should be able to find investments you like.

HSA Bank, for example, offers a full brokerage via TD Ameritrade, while Health Savings Administrators lets you pick from 22 low-cost Vanguard funds. Examine account fees, too, as charges for banking services and account maintenance are common. You don’t want to avoid the drag of taxes only to have your balance pulled down by fees.

MONEY Financial Planning

Nearing Retirement, With 3 Tuition Bills to Pay

Read Jonathan Haidt: Your Personality Makes Your Politics Social scientists find many questions about values and lifestyle that have no obvious connection to politics can be used to predict a person’s ideology. Even a decision as trivial as which browser you're using to read this article is imbued with clues about your personality. Are you on a Mac or PC? Did you use the default program that came with the computer or install a new one? In the following interactive, we put together 12 questions that have a statistical correlation to a person's political leanings, even if the questions themselves are seemingly apolitical. At the end of this (completely anonymous) quiz, we'll use your responses to guess your politics. [time-interactive id=political_morality] How it works We created this survey by drawing on several sources. Research by Sam Gosling, at the University of Texas, has found that liberals generally score higher than conservatives on the trait of "openness to experience." They are more likely to seek out new experiences (such as fusion cuisine), choose to watch documentaries, or enjoy art museums. They have less conventional notions of what is proper in a romantic relationship, so solo pornography consumption is OK. Conservatives are more likely to stick with what is familiar, what is tried and true. Hence, they are more likely to use a PC than a Mac and are more likely to stick with that PC's default browser, Internet Explorer. Conservatives score higher than liberals on the trait of conscientiousness. They are more organized (neat desks), punctual, and self-controlled (rather than emphasizing self-expression). We also drew on several surveys from YourMorals.org for data about how values correspond to politics. Conservatives, for example, tend to value respect for authority and group loyalty more than liberals do. Conservatives, therefore, typically show less ambivalence about American history and have a stronger preference for dogs, who are more loyal and obedient than cats. Liberals are more universalist than nationalist; they tend to support the United Nations more, and to wish that the boundaries between countries and the divisions between nations would fade away (as in John Lennon's song “Imagine.”) Each of these items is only a weak predictor of ideology. We added them all together (weighting some more than others) to create a short scale with moderate predictive power. But of course people are highly variable. Many conservatives love exotic cuisines and the Metropolitan Museum of Art; many liberals have neat desks and hate cats. And many people can't place themselves along the liberal-conservative dimension – such as libertarians, or people who find wisdom on both sides on different issues. For more in-depth surveys on a variety of subjects, please visit YourMorals.org. Update: Jan. 10, 2014, 11:00 a.m.: It works! Our analysis of 17,000 responses from readers who chose to report their actual ideology found a strong correlation (r=0.604, for those of you keeping score) between a person's self-reported ideology and the output of the quiz. This is a particularly strong correlation given the wide degree of personal variation in taste that is intrinsic to this sort of research. The biggest weakness we discovered is that the results from our survey were less distributed across the spectrum than the figures for people's self-reported ideologies. A person who reported themselves as "very liberal" or "very conservative" tended to receive scores that were artificially close to the center. As of this update, the quiz now employs a basic statistical correction to more accurately reflect the extremity of one's politics. The "direction" of the results—whether you're more conservative or more liberal—is unchanged. See how your preferences in dogs, Internet browsers, and 10 other items predict your partisan leanings.

At 59 and 60, Kim and John Keuning are closing in on retirement — but they aren’t quite ready for it.

Six years out from their target date, the Duluth, Minn., duo have roughly $500,000 saved. Selling the small ad agency they own could net them another $150,000, they figure. (None of their five grown children is interested in taking it over.)

The sale of a vacation cabin and office building could add $250,000 to the pot. Even so, they’ll likely come up short.

Saving more — they now put away $12,000 of their $150,000-plus income — will be tough. The Keunings carry hefty loans on their home ($334,000) and office ($156,000).

Plus, they’re trying to pay off $40,000 in credit card debt from home repairs. And they’re helping support their three youngest kids with college tuition, student loan payments, and rent. Total outlay: $32,000 annually.

“We know we spend a lot on them, but it’s something we want to do,” Kim says. “So how do we do that and everything else?”

Three fixes

Mortgage the plastic. The average rate on Kim and John’s plastic is 15%. To pay off the cards, Indianapolis financial planner Michael Kalscheur suggests they take out a $40,000 30-year mortgage on their paid-off vacation cabin.

At 4%, the loan would cost about $200 a month vs. their current payment of $1,300.

Related: How much will you need for retirement?

They plan to sell the cabin just before retirement, and when they do they can use the proceeds to pay the rest of the mortgage.

Redirect the payments. In the meantime, they can use the extra $1,100 in monthly cash flow to pay off their car loans. Once that $10,000 debt is wiped out, they’ll have $1,600 a month to build their emergency fund. Kalscheur wants them to have at least $20,000.

When this is complete, in about nine months, they should max out their Simple IRAs (in 2013, they can each put in $14,500).

Related: How often should you check your retirement investments?

Assess income needs. Following this plan, Kim and John will have almost $1.6 million in six years, after selling the business, office, and cabin. That will allow them to retire with about 72% of their income.

If they want more room in their budget — to, say, escape Minnesota’s winters — they’ll have to work a little longer. Or they can beef up the business to sell it for more by nixing debt, locking clients into contracts, and recruiting employees who’ll be indispensable to the next owner, Kalscheur says.

MONEY annuities

Buying an Annuity for Retirement Income? Think Twice

Eyeing a variable annuity to help bring in more retirement income? Or already have one? The terms are changing to make payouts less generous, so you'll have to decide whether to fish or cut bait.

Get a minimum income for life, no matter what. That compelling sales pitch has propelled investors to pour $1.5 trillion into variable annuities in the past decade.

Driving most of those sales was not the annuity itself, essentially a tax-deferred investment account; rather, buyers have been attracted by the “living benefit” rider, an optional feature ensuring that you can draw a base income from your investments regardless of how the markets perform or whether you drain your account.

Before the financial crisis, riders commonly guaranteed impressive returns of 8%-plus and annual withdrawals around 7%. So it was no wonder that over a period that included two bear markets Americans eagerly rushed into these insurance products, seeing them as the antidote to investment risk.

These days, however, the variable annuity and rider combination isn’t looking like the panacea it once seemed to be.

Over the past 18 months, most of the insurers that sell these products have seriously scaled back guarantees offered on new contracts while hiking fees and restricting investment allocations on both new and existing policies.

Seven major firms, including AXA, John Hancock, and Prudential, have limited or prohibited additional investments in some of their older, more generous contracts. A few companies have even offered buyouts to customers willing to cancel the rider.

Meanwhile, the Securities and Exchange Commission is now looking into whether buyers were ever made fully aware of the potential for such changes.

What’s going on? First, the financial crisis tanked customers’ portfolios, putting insurers on the hook for billions in guarantees on pre-2008 contracts. Since then, years of low interest rates have left firms uncertain that they will be able to satisfy future payouts.

“A lot of companies got burned,” says Moshe Milevsky, a finance professor at Toronto’s York University. Besides rejiggering the terms on their contracts, many insurers have reduced the number of policies they sell; last year two big names — Hartford and Sun Life — dropped out of the business altogether.

Related: The Social Security mistake that could cost you thousands

If you have a VA or were thinking of buying one, you’re probably wondering where all this leaves you. For owners, the answer depends on your contract, your account value, and the changes to your terms.

For income shoppers, it ultimately comes down to what risks you can accept — though there are cheaper, simpler, and more profitable ways to ensure that you won’t outlive your money.

The sections that follow will help you make the right decision for you.

What the changes mean

While each insurer is tweaking its terms differently, there are a few common threads: limited investment freedom, tightened minimum-return and income guarantees, and higher fees.

The most common — and arguably most impactful — shift has been to cap owners’ stock allocation. Through the VA itself, investors used to be able to choose from a large menu of mutual funds. You could go whole hog into stocks, if you so desired, knowing you had the rider’s guarantees as a backstop.

Related: Annuity payment calculator

Today most buyers who opt for a rider — 88% do, says research firm LIMRA — will see their stock stake capped at around 60%. You may also be required to use model portfolios or “managed-volatility” funds, which automatically shift assets from stocks to more conservative choices if your account value falls a certain percentage within a short time.

Such restrictions can have a huge impact on the value of the rider because of how the vehicle is structured.

First thing to know: While the actual money you’ve stashed in a VA-with-rider fluctuates with the value of your investments, a hypothetical account called a benefit base grows at a minimum “roll-up” rate each year — say, 5% — even if your real-life investments lose money. If your actual investments do better than this guaranteed return, the benefit base is increased, or “stepped up,” to match them.

The rider also has a set schedule of guaranteed withdrawal rates based on the age you start collecting. Whenever you decide to start taking income, the percentage is applied to your benefit base to determine the amount. Then the money is drawn from your actual account.

You can generally tap the account for more, if needed, as well, though it will affect your future income. In the most popular kind of rider, known as the guaranteed minimum withdrawal benefit, the insurance kicks in once withdrawals drain the account, allowing you to continue receiving the same amount for as long as you live. (If you die before depleting the account, your heirs get what’s left.)

Investment restrictions decrease the chances that your portfolio will suffer a major downturn, thus decreasing the chances the insurance will come into play at all. Also, the smaller your stock allocation, the less potential for step-ups. “If you’re forced to have a balanced allocation, what’s the point of buying protection?” asks Milevsky.

Changes in guaranteed income further diminish the rider’s value. Two years ago 70% of riders offered a 5% withdrawal rate. Now less than 50% do, says Morningstar.

A lower withdrawal rate means it takes longer for your account to run out and longer for the insurer to have to shell out its own money. Roll-up rates have drifted down too, from a typical 8% to around 5%, and some companies have found ways to further limit them (such as capping the number of years).

More: Rising fees

Then there are the fees.The average toll for the popular minimum withdrawal benefit rose from just under 1% in 2009 to about 1.25% as of December, says Morningstar. Add to that the hefty costs of the base VA itself and expenses end up biting off 3.7%, on average, of the account value per year, according to the latest figures.

Over time that severely crimps your portfolio’s ability to grow. Even after a bear market like the one in the 2000s, $100,000 in a mutual fund portfolio of 60% large-cap stocks and 40% intermediate-term bonds (assuming 0.75% in fees) would have grown to around $131,600 in 10 years. The same investment in today’s average VA rider would be worth only $95,500.

Bottom line: These changes greatly reduce the payouts possible compared with past contracts. In a bull market, you’re looking at thousands less in annual income.

The cutbacks give ammunition to the product’s detractors, who have long argued that high fees eroded VAs’ supposed benefits. “The upside potential on these is just a marketing fantasy,” says Scott Witt, a Milwaukee-area actuary and fee-only insurance adviser.

Proponents counter that the products allow investors who remain scared stiff by the markets to feel comfortable with a bigger stash of stocks. VA riders “deliver peace of mind through guarantees of lifetime income, which can be especially valuable in an uncertain economic environment,” says Whit Cornman, a spokesman for the American Council of Life Insurers.

Related: How much will you need for retirement?

But even some fans say that skimpier riders have made them less likely to recommend the products. “Today’s benefits are so inferior,” says Scott Stolz, president of the insurance group at financial advisory firm Raymond James.

What to do if you already have a VA-rider combo

Know what you’re in for: Owners with contracts written before 2011 have been most vulnerable to term revisions. Thus far the most common changes have been to restrict stock allocation or force customers into more conservative options, to raise fees on the riders, and to limit additional contributions (guarantees haven’t been touched for existing policyholders).

The fine print in the contracts generally allows your insurer to make these types of revisions, though the company will be required to inform you when terms are amended.

Haven’t heard anything yet? You are not necessarily in the clear, says Stolz of Raymond James: “The longer interest rates stay low, or if there is a significant drop in the stock market, the more companies will feel a need to make changes.”

Evaluate your guarantee. If you’re being hit with a change, you have two choices: Accept the new terms and keep the contract, or cancel and find an alternative investment.

One way to make this decision is to look at the difference between your benefit base and the account value: If the former is at least 15% higher, you should probably keep the rider, says Wheaton, Ill., financial planner Robert O’Dell.

Calculating how much income you could take right now can also help you benchmark, says Stolz.

Start by multiplying your withdrawal rate by your benefit base; for example, 5.5% of a $500,000 benefit base is $27,500 a year. Next, compute what percentage of your actual account balance that income represents. On a balance of $435,000, $27,500 represents 6.3% — much more than the 4% initial maximum that financial planners would recommend drawing from a portfolio to sustain a long retirement.

“It’s an indicator of value,” Stolz says, one that would probably outweigh the effect of any higher fee or investment change.

What if you’re offered cash to drop the rider? Offers can be tempting (Hartford, for example, is dangling up to 20% of the benefit base for certain accounts). But as David Blanchett, Morningstar’s head of retirement research, points out, “If the insurer wants to buy your policy, taking the cash probably isn’t a very good deal for you.”

You’re likely to have a valuable guarantee that the company doesn’t want to get stuck paying.

Keeping it? Start drawing now. An analysis published in February by York University’s Milevsky concluded that most owners of older rider contracts should take income sooner rather than later. Essentially, he said, at age 65 and beyond, the income from taking payments now outweighs any increase you might achieve through step-ups in your account value down the road.

Related: Can you afford to retire?

“The sooner you run down the VA and get the account to ruin, the quicker you start living off the insurance company’s dime and stop paying insurance fees,” his report says.

That said, if the percentage you can withdraw goes up with age and you’re close to a break point — you’re 69, say, and the percentage goes from 5% to 5.5% at 70 — wait until then.

Ditching it? Minimize your costs. Early on, variable-annuity owners are hit with a charge on the way out the door. These “surrender fees” usually decline over five to seven years — say, from 8% the first year down to 2% in the seventh. Wait to cancel until the percentage owed falls below the annual expenses you’re paying so as to avoid losing a lot of your investment value.

Also, be aware that if you own the VA outside an IRA, canceling could trigger a big tax liability: You’ll owe ordinary income taxes on investment gains.

You can avoid those by exchanging the annuity for another in what’s called a 1035 exchange, says financial planner O’Dell. See the next section for alternative products that can secure your income. Just make sure to get 1035 forms from the insurer.

More: What to do if you’re shopping for income

What to do if you’re shopping for income

Take stock of your stock anxiety. Even before the changes in rider terms, “there were cheaper ways of guaranteeing income,” says insurance adviser Witt.

Still, the product can make sense for certain people — in particular, those so fearful of another 2008 that they’re taking much less risk than they should. For such individuals, a VA-rider combo presents a shot at growth, notes Miami financial planner Bruce Cacho-Negrete.

To overcome the fees, though, you need to be mostly in stocks, he adds: “If you can’t get at least 80% exposure, it’s harder to make the case for these.” (Right now only one insurer, Jackson National, lets you go in that deep.)

Invest conservatively now, annuitize later … Got a stronger stomach? You’ll have potential for more income if you stash your money in a conservative, low-fee mutual fund portfolio until you need income, then purchase an immediate annuity at that time.

With this type of annuity, you hand over a lump sum to the insurer and start getting paid immediately. Unlike the VA, the amount you invest is the insurer’s to keep even if you die the next day. But payouts are higher, since insurers can transfer premiums of those who die early to those who live longer.

Currently, a 65-year-old man investing $100,000 could get $6,800 a year. The size of the check depends on your age and interest rates at the time of purchase, though — good reasons to wait to buy. (Find quotes at ImmediateAnnuities.com.)

Related: What are the different types of annuities?

Last September, Wade Pfau, a researcher at the American College of Financial Services, analyzed various income strategies for a 65-year-old couple, including immediate annuities, a VA-rider combo, stocks, and bonds.

His conclusion: A mix of stocks and immediate annuities provided the best balance of guaranteed income and flexibility to draw from savings for lifestyle needs or to cover emergencies. The exact percentages of each, he says, depend on your preference for meeting a spending goal, vs. having leftover wealth. But, Pfau adds, “50% stocks/50% annuity could be a pretty good mix.”

…Or nail down later income now. An alternative strategy would be to buy a deferred-income annuity, similar to an immediate annuity except that it allows you to lock in future income. You buy now and delay paychecks anywhere from 13 months to 45 years. A 65-year-old man with $100,000 can buy $16,520 a year starting at age 75; if he waits until 85 to start collecting, he’ll get $62,950.

The reason for the gaping difference: the increased likelihood he will die between 75 and 85 and the insurer will pocket the money. (Shop for these, too, at ImmediateAnnuities.com, but be aware that a deferred annuity is different from a deferred-income annuity.)

Related: Want $1 million? Protect your portfolio

On the upside, this method cuts out investment risk in the period before you need income. Downside: You lose the potential for market rallies that would boost your portfolio and interest rate hikes that would make the contract more productive.

The most effective way to use a deferred-income annuity is to buy one with a slim slice of your portfolio and push the income way into the future, says Pfau. The goal: to ensure you’ll have some income in your later years if your portfolio runs dry. You’ll pay much less for that security than you would for a variable annuity.

MONEY Second Career

$800,000 Saved, Dreams of Breeding Horses

Advice for turning a fantasy into reality.

Growing up in Kentucky, Bobbie Jackson vividly recalls when her family got their first horse. It was an older brother’s 16th birthday, and for his present he chose not a car but a steed.

Ever since then she’s loved all things equine. “Horses are such majestic animals,” she says. “The fact that I can interact with them just thrills me.”

So when she and her husband, Mike, moved in 2007 from St. Louis to a family home he inherited on 150 acres in Tennessee, Bobbie’s first thought was raising horses. Having worked with autistic children in schools and respite centers, she got the idea to offer free therapy rides and to sell horses to families with special-needs kids.

As for Mike, a retired engineer, he’s interested because his wife is: “I’ve got plenty of reasons to get up in the morning already, but it is fun to see Bobbie happy.”

The Jacksons have two mares (one a miniature) they wish to breed, and also want to buy three foals. They expect to need a barn for hay storage and a run-in-shelter for the horses. Plus, they want to update the farmhouse they call home.

With $800,000 in savings and an income of $93,000 from a pension, Social Security, dividends, and interest, the couple are well positioned for a comfortable retirement. But they’re worried about whether they can also execute their horse farm and renovation plans without a hitch.

“I don’t require a certain income from the business,” says Mike, “but I’d like to earn enough to more than offset expenses.”

 

THE REALITY

Making a profit will be tougher than Mike thinks. Starting up will take some investment: The biggest cost will be the hay barn and run-in shelter, which prefab farm structure company Watson Metals in Manchester, Tenn., puts at $15,000 to $25,000.

Related: Banker finds sweeter career: Making ice cream

The kinds of horses Bobbie and Mike are looking for — mixed breeds — are cheap right now, selling for 30% less than they had been before the recession, says Nona Garson, head of the InterContinental Sport Horse Auction. So the couple should be able to pick up foals for less than $500 apiece.

Additionally, to get specialty insurance needed to cover liability risks involved in hosting therapeutic riding, they first need to get certified in equine-assisted therapy, which costs $1,000 per person and can take six months to a year.

Where the Jacksons will really take a hit is in the cost of running the business. They’ll lay out about $2,500 a year per animal for food, vet bills, and hoof care. Farm insurance adds another $2,000 a year — though it includes homeowners coverage, which they already pay.

The Jacksons are currently maintaining two horses, so three foals and insurance premiums will add about $10,000 to their expenses. They can probably find a stud for the horses for about $500, says Rebecca Smith, a breeder in Chagrin Falls, Ohio. But caring for a pregnant mare during its 11-month gestation tacks on another $1,000 to $2,000. Then foals typically require at least nine months of weaning and training before they can be sold.

Since the Jacksons don’t plan to charge for the therapy rides — “How can I not help these children?” says Bobbie — they won’t see revenue for some time. Even then, it won’t be much: A good market for buying horses is a bad market for selling them. And the universe of families looking to own a horse for a special-needs child is probably quite small.

All told, while Mike was aiming for a small profit, he’s more likely looking at tens of thousands in losses each year, for quite a few years.

As for the renovation costs, Bobbie and Mike figure their home upgrades will run $65,000.

 

THE PLAN

“They can still do this — as long as they’re willing to put limits in place,” says Grove City, Ohio, financial planner Jo Anne Paynter (herself a rider). Here’s how:

Fund the business out of income. The Jacksons spend a lot less than they bring in each year. Mike estimates that they have an average surplus of $22,000. Keeping their horse expenses below that would allow the couple to run the business without dipping into savings — which will in turn help them preserve the income they’ll need for the business, says Paynter. Their wiggle room will get smaller as they add animals.

But Mike and Bobbie can decide each year whether to expand based on their anticipated cash flow (which will go up once they start taking required minimum distributions from retirement accounts).

Determine whether it’s a labor of love. The Jacksons should think hard about whether they want to proceed with their dream as is, even if they won’t break even. They might consider whether there’s anything else they’d want to do with the money they’ll spend on horses; they should also create a business plan.

To increase their revenue potential, they could charge a fee for the rides to cover their costs or expand the market for the kid-friendly horses they’ll breed to 4-H and pony clubs and the like.

Pay for renovations out of cash. Assuming they keep the cost of the farm buildings and upgrades to their home to $90,000 or less, the Jacksons can use their savings for those purposes without compromising their income potential, says Paynter. They should draw from the $250,000 they have in bank accounts.

Protect their assets. Besides getting insurance — a must — they should incorporate their business, a legal process that should cost less than $500.

“This would further insulate them from liability,” says New Hope, Pa., financial planner Mark Kelly. If they are sued, for instance, their personal assets wouldn’t be at risk.

So far none of the hurdles have shaken Bobbie; rather; she’s fortified by having a plan. Says Mike: “She’s already laying out cross fencing for me to do!”

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Couple’s path to $1.3 million eco-friendly dream home

MONEY Second Career

Our Dream: Run a $750,000 Hotel in Costa Rica

Advice for turning a fantasy into a reality.

Yessenia Cruz has dreamed of returning to Costa Rica ever since visiting there 15 years ago. This time she isn’t looking for R&R. She and her husband, Roberto Garcia, want to relocate there at 55 to open a casita-style hotel by the beach.

Both say they’ll be ready to leave their corporate careers — she’s a project manager; he’s an architect — and the fast pace of the Big Apple. “We love what we do but want a more balanced life,” says Yessenia.

Though Roberto has never been to Costa Rica, he’s just as excited: “I love what the city offers, but I love nature too.”

At the same time they worry about whether packing for paradise will compromise their retirement security or put the college education of their 4-year-old son, Nathaniel, at risk.

THE REALITY

Since they want to be what the industry calls “lifestyle innkeepers” — who open seasonally or settle for lower occupancy so that they can enjoy downtime — they can’t count on much income from the hotel. That means that in the next 15 years they’re going to have to save for a long retirement while also amassing money to buy the business and pay fully for Nathaniel’s tuition at a private college, as they’d like.

On the first goal, at least, Yessenia and Roberto are looking good.

They stash nearly $30,000 of their $202,000 annual income, putting them on track to have $2 million by age 55, says Colorado Springs financial planner Jane Young. Using a 4% withdrawal rate, they can take out $80,000 the first year, and adjust for inflation subsequently, for a very small chance of their money running out. That income will exceed their needs, since Costa Rica’s cost of living is about half that of the U.S.

With plans to live at their inn, Yessenia and Roberto should do very well on $36,000 a year in today’s dollars ($53,000 by the time they retire), says Jason Holland, Costa Rica editor for InternationalLiving.com, a site focused on how to live, work, and retire overseas. They’ll need a nest egg that size should they ever move back to the U.S., plus it gives them a margin of error on the hotel.

Related: Suite dreams — opening a bed and breakfast

A greater challenge will be saving another $1.2 million to use for the hotel (which will cost about $750,000 by the time they retire, Holland says) and Nathaniel’s education ($430,000, according to Young).

They also have a sharp learning curve ahead. As fluent Spanish speakers — Yessenia grew up in Puerto Rico, and Roberto’s family is from the Dominican Republic — they have some advantages over other expat entrepreneurs. But neither has experience in hospitality or running a business.

 

THE PLAN

“If they keep up a steady savings pace, Roberto and Yessenia can make this work,” Young says. Here’s how:

Get cracking on college. They now sock away $800 a month for Nathaniel’s schooling; they’ll need to up it to $1,250.

Young advises putting two-thirds into a 529 college plan and the rest in a mutual fund that’s 70% stocks and 30% bonds to give the couple flexibility to tap some of the money if needed. When Nathaniel turns 13, they should dial back the stock stake.

Start a hotel fund. The couple have $200,000 in cash for emergencies, almost double what they need.

Young advises putting $85,000 of this into a 70% stocks-30% bonds mutual fund as seed money for the inn, adding $270 a month, plus half of Yessenia’s annual bonus (up to 10% of salary). Five years before moving, they should shift the funds to cash and short-term bonds.

Use the house for the balance. Roberto and Yessenia should refinance their 4.5% 30-year mortgage, which has a $240,000 balance, to a 15-year loan to build equity faster, Young says. At a 2.9% rate, their payment would be just $167 more, and if their home appreciates 3% a year, they’ll net $400,000 at 55 to put toward the inn.

Get educated. To improve their odds of success, they should get training in hotel operations and hospitality through a group like the Professional Association of Innkeepers International (paii.org). Also, they can get hands-on practice running an inn by filling in for owners who are on vacation via the Interim Innkeeper program (inncaring.com; $750 per couple).

Start shopping. The family should visit Costa Rica ASAP to ensure that Roberto is really onboard with moving.

Five years out, they should start taking scouting trips to investigate locations and talk to local hotel owners, says Holland. Once they settle on an area, they can hire a broker to find turnkey operations. “Buying an existing hotel with a website, listings in guidebooks, and maybe even guests on the books will give them an easier start,” says Jay Karen, CEO of the PAII.

Plan an exit strategy. “Will you close the inn in five years, or do you want to sell it for a profit?” asks Karen. The answer, he says, will drive how they run the business: To attract buyers, they’ll need to be able to “show consistent occupancy rates and profitability.”

For now, Yessenia and Roberto are focused on the entrance plan. As she says, “This confirms that Costa Rica isn’t just a fantasy.”

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